Cleveland Clinic Diagnoses Health-Care Act

How the Cleveland Clinic is preparing for changes in care--and why it won't hire smokers.

By

Anna Wilde Mathews

Dec. 18, 2012 10:18 p.m. ET

Just over a year from now, the Affordable Care Act is set to unleash enormous change in the health-care sector, and Cleveland Clinic Chief Executive Delos "Toby" Cosgrove is preparing his institution by expanding its reach and striving to make caregivers more cost-conscious.

The nonprofit has grown steadily since Dr. Cosgrove, a heart surgeon, took over in 2004 and now includes eight hospitals in Ohio along with its flagship campus and facilities in Florida, Las Vegas and Toronto. It's also helping to build a new hospital in Abu Dhabi.

Dr. Cosgrove has pushed efforts to translate the system's research work into new commercial opportunities ranging from a social-media site on beauty to a medical-device startup developing artificial-heart technologies. Cleveland Clinic is also striking deals with employers such as Wal-Mart Stores Inc. to send workers to there for complex procedures, moves that lock in patients for high-end surgeries.

The new federal provisions—which include cutbacks to Medicare payments and the creation of new health-insurance marketplaces for consumers—will test institutions like Cleveland Clinic, as will new forms of payment that swap the fee-for-service model for one intended to reward hospital systems for efficient, high-quality care.

Dr. Cosgrove, 72 years old, sat down recently to discuss the changes to come. Edited excerpts:

WSJ: How does the health overhaul affect you?

Dr. Cosgrove: We knew that we had to reduce costs and we had to drive a more efficient health-care delivery system. [The law] just gave additional impetus to get that done.

WSJ: What risks do the exchanges carry for systems like yours?

Dr. Cosgrove: The forcing function of the ACA is going to drive more coordination of care. It's going to not allow doctors to be necessarily independent; they'll have to be in relationships with hospitals and other providers. All of these things carry big changes and] there are risks to them. I think we are in good shape to start with because of our model of care.

WSJ: Are you looking at possible mergers?

Dr. Cosgrove: Absolutely. We have been in discussions with numerous players from one coast to the other. We have yet to execute major M&A. But we are in the prospect of having those discussions.

WSJ: With what types of possible partners?

Dr. Cosgrove: Hospital systems…We have talked to providers generally.

WSJ: Are you considering launching your own health-insurance plan?

Dr. Cosgrove: Are we considering forming our own? No. Would we consider joining with another one? Yes.

WSJ: You didn't join the federal government's accountable-care-organization initiatives, which aim to reward health-care providers for efficiency and coordination. What is your approach to these new methods of payment?

Dr. Cosgrove: We will have an ACO. We didn't [initially join], because we thought that there was a lot of learning to be done. We would just as soon be fast followers, rather than pioneers. Pioneers frequently have high mortality rates.

WSJ: Why do you pay doctors a salary, rather compensate them based on productivity?

Dr. Cosgrove: I, as a cardiac surgeon, never had to justify the fact that I was doing a heart operation, because it didn't make any difference to me financially. I could tell someone that I think they needed a heart operation and it wasn't going to do anything for my back pocket. You take the financial incentive out for doing more or doing less.

WSJ: There is a lot of concern that health-provider consolidation leads to higher costs. Is that legitimate?

Dr. Cosgrove: We're going to not drive the cost in a particular community...What we're talking about is consolidation on a much bigger scale, across the country. I don't think that anyone would suggest that supermarkets have not reduced the cost of food across the United States or that books from Amazon don't cost less than books do from your local bookstore.

WSJ: You are consolidated in the Cleveland area. Do you use that leverage in negotiating prices with health insurers?

Dr. Cosgrove: Yes, we do. We also consolidate services and drive efficiency of services across this organization. We've consolidated our hospitals. We've consolidated cardiac surgery, pediatrics, rehab, psychiatric care, obstetrics, to bring them together and have higher quality and lower cost, more efficiency.

WSJ: Has that translated into lower prices that you charge to private insurers?

Dr. Cosgrove: No. But we know that the payer is going to pay us less [in the future], so we're getting ready. If we hadn't done that [boosted efficiency], we'd probably be running in the red. Medicare pays 6% under the cost of delivering care, Medicaid 13% under the cost of delivering care.

Dr. Cosgrove: The facility fees are really driven, frankly, by Medicare [payment rules]. If there wasn't a facility fee, we wouldn't do it. But we were out of compliance with the Medicare law if we didn't have facility fees. By the way, so does everyone else in this community.

WSJ: Why bill them to the private insurers as well?

Cleveland Clinic

Operating Revenue, in billions

3Q 2012: $1.53

3Q 2011: $1.48

Operating Income, in millions

3Q 2012: $32.1

3Q 2011: $66

Employees*

mid-Dec.2012: 41,971

end 2011: 39,347

*Doesn't include residents.

Dr. Cosgrove: If everybody does it, why wouldn't we?

WSJ: What are your plans internationally?

Dr. Cosgrove: The Abu Dhabi thing is a very big opportunity for us. That is a huge undertaking. There are going to be a lot of other opportunities if we do this one well.

WSJ: Would you look at other places?

Dr. Cosgrove: Absolutely. First we're going to place referral offices [sites that provide services including medical education and coordination of overseas patients' visits to the clinic] in several locations around the world. We have placed one in Riyadh. We are looking at China, England and perhaps Turkey, for openers.

WSJ: You've started posting the prices of various health-care supplies in operating rooms. Should doctors consider costs? Some argue they should weigh only clinical factors.

Dr. Cosgrove: You can't do that. What is the most expensive instrument in the hospital? The doctor's pen. We have to make them cost-conscious. Otherwise, how are we going to reduce the cost?

WSJ: Do you think employers will stop providing health insurance, even though they can pay a penalty under the health overhaul law?

Dr. Cosgrove: The first ones will be the small companies…Every CEO I've talked to knows how much he'd save between insuring his people and paying the federal penalty.

WSJ: What does that tell you?

Dr. Cosgrove: The first time some big player does that, it's going to fall like dominoes. What that does is drive everybody to the exchanges.

WSJ: What does that mean to you?

Dr. Cosgrove: It's going to be a faster move towards one payer. Increasingly, people think that in 10 years you're going to have 75% of the health-care costs paid by the federal government.

WSJ: You think we're moving toward a single-payer system?

Dr. Cosgrove: Well, the question is how long...I don't think in the next 10 years, but I think it probably is going to head in that direction.

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